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When Ross Perot likened NAFTA to a giant vacuum cleaner sucking jobs away from America to Mexico, California, as a separate country, would have comprised the 8th largest economy in the world. Today, we’d come 5th. We’ve grown a lot despite what Trump described as ‘the worst deal of the century.’
Trans-Pacific trade is the largest reason why we’ve grown, benefiting from vast trade networks linking North America with Asia: it is the ‘secret ingredient’ underpinning most California successes for decades. ‘Silicon Valley’ may look like a creation of a host of immigrants and their children (Apple, Google, Tesla, Intel) – but California’s unique geographic position and climate makes it attractive for eyes throughout the greater Pacific. Housing? Many states restrict new homes – but ours are worth more than others because a billion+ people throughout the Pacific see great value in raising families in California.
NAFTA played a significant role in shaping modern California. Linking two of America’s three largest trading partners – Canada, $583 bn in total trade volume, and Mexico, $560 bn – set up a giant, semi-harmonized bloc that forced every trading partner across the Pacific to take note and respond. Flows from Asia focus on reaching California first as the main gateway to America: most trade from China ($640 bn), Japan ($205 bn), and South Korea ($120 bn) relies heavily on California.
Yet while California benefits immensely from the world NAFTA helped create, ordinary Californians often do not. Large manufacturers have largely abandoned California for China (which has no free trade agreement with America); to a lesser extent, they’ve expanded in Mexico and other countries. Sometimes new ‘specialty’ manufacturers replace them, offsetting the losses (e.g., if California produces fewer Fords and Toyotas, we can produce more manufacture Teslas); sometimes they do not.
Yet there are other costs: gridlock as that vast volume of trade flowing through California ports manifests as fleets of trucks moving through our freeways. Jobs paying a recent high school grad enough to buy a house in Orange County are rarer than panda bears. Poverty is shockingly widespread in California, despite the incredible prosperity our trade ties generates.
Some folks win and others lose from every trade deal. For this one, unlike NAFTA 1.0, Californians gain little/nothing – and Orange County loses. Why?
- Requiring 30% (later, 40%) of goods to be made in ‘high wage’ factories paying $16/hr encourages manufacturers to set up outside of California to best take advantage of possible savings from US-based manufacturing. California’s $15/hr minimum wage means they gain little from making products here – but it could help factories grow in Wisconsin, Ohio, Indiana, and other states looking to pay low wages to ‘temporary’ workers (who are scheduled to be replaced with robots anyway). We’ll see few new factories in the OC in the next few years that set up here as a result of NAFTA 2.0 – most of what comes in will choose California as a base for other reasons.
- Setting a 75% ‘North America’ point of origin requirement for autos and auto parts hurts suppliers, mechanics, car salesmen and others trading in vehicles and parts manufactured outside of North America. Automakers like Toyota, Hyundai, and Honda built extensive trans-Pacific systems, and while they may build some parts or final assembly in America, every vehicle reflects contributions deeply touched by the trans-Pacific system. The new rules complicate the process for importing goods, which will in turn hurt smaller manufacturers of all stripes, even if larger manufacturers can, in some cases, build systems to mitigate those costs. A handful of OC-based suppliers may benefit slightly; most folks in the OC will lose.
- New intellectual property rules, esp. on pharmaceutical products, increase the ‘exclusive’ term for new drugs from 8 to 10 years. That could raise drug prices for Canadians and Mexicans, adding some profits to the largest pharmaceutical companies, but for most Orange County residents, the effect will mean little more than a modest price hike on drugs if they consider undergoing an expensive procedure in Mexico.
- The big ‘new’ gains from NAFTA 2.0? Dairy? Wine? Anyone know of a single Orange County winemaker or dairy farm that may benefit?
Californians need not see trade agreements per se as a threat: trade makes us prosperous as a state, and when given a set of rules, we compete more fiercely than anyone, while offering a reward of a wonderful place to raise a family that is more attractive than any other state.
But the balance of costs and benefits from the USMCA will hurt Orange County while offering little if any benefit to most of us. We should have expected nothing else from Trump: he’s no friend to California, and especially not to Orange County. Yet the shocking fact is we have a large number of very senior members of Congress from Orange County who should have managed to get something – anything – of value to the voters in Orange County. Why did they fail to get anything that folks here might have wanted?
Royce, Rohrabacher: Don’t bother US!
*Thanks so much for this Donovan. People do not understand the the United States has a GDP of about $19 plus Trillion dollars a year. The Chinese have a GDP of currently $23 plus Trillion a years, with about a 7% annual growth rate threw 2045. The European Union currently has a GDP of over $20 Trillion. Tariffs guarantee that US consumers will be paying just about 25% for food, transportation, consumer goods and Autos-Lt. Trucks starting January 19, 2019. That is when the Chinese Tariffs and the Steel and Aluminum Tariffs kick in with a vengeance! With our crushing National Debt going to well over $23 Trillion, our annual Deficit kicking 12% and with our doubly crushing Pension Obligations things could get tough. As the Oil Prices rise only here in the US, because everyone else is going to electric vehicles, the taxes will also spike….but the losers are us – the consumers!
*Here is an additonal thought balloon: Californa has the 6th largest economy in the world. Russia is ranked 12th. China is number one. India is bigger than Russia.
And we want to institute Tariffs on China? You look under “Blunder” in the Dictionary and you will find Donald J. Trump’s photo!
Nominal GDP
US: $19.39t
China: $12.01t
Don’t buy into this hippy parody GDP.
Ron & Anna: China’s GDP is still a fair bit smaller than the USA’s.
What’s most interesting to me is that in the five years after NAFTA, both Mexico and the USA saw impressive growth (most eyes in California were on ‘dot-coms’ – but there was immense growth in manufacturing in America as well). Compare that to post-2001, when China joined the WTO: California still benefited and grew as a whole from the trans-Pacific trade in goods – but manufacturing investment changed in Mexico AND in California (and mostly shut down in California).
In general, Americans are exceptionally competitive when there is a fair playing field: free trade agreements can work well for most of us. But when one side or the other cheats, the benefits of trade flow to a tiny group of very well-connected people: that’s how it can be true that California grew to become a much larger economy, with NAFTA 1.0 offering some tail winds to push that forward – BUT still has one of the largest poverty rates in the country. The OC delegation in Congress has some very senior members, who happen to be in the majority party: where were they? Why did they fail to bring back anything of benefit to voters here?
Also, if there’s interest, I’ll do a separate post on the tariffs, since that’s a very different story. The net effect of the tariffs is:
-OC Home owners: LOSE BIG, esp. if they’re eyeing any home improvement project – whether that’s adding solar panels or just about anything else using off-the-shelf components
-OC Chinese businesses with any trans-Pacific supply: LOSE
-OC Korean businesses with any trans-Pacific tie: LOSE (but lose a little less than Chinese)
I could break it down by sectors, but the tariffs will hurt the OC massively: we have no large dairy export industry so far as I know, no steel plants, no auto plants, and we’re not going to have them either. We get nothing at all, either short or long term, except confusion and disruption in the supply chain. And that supply chain enriched Californians immensely: it’s the basis for why home values here are so much higher than in the rest of the country. Most folks don’t realize that Trump is betting the value of their houses (not his own house)…so they don’t think these things are that important.
*OK, have to admit our China figures were wrong – must have read the wrong line….$12.3 Trillion seems to be the correct number…..however..what do they say: Liars figure and Figures don’t lie! How many so-called US Companies are actually still here on shore? They put up an office in a store front and say they are an American Company while building everything off shore or hiring HI-B Visa folks to do their Engineering work here at have the prevailing rate. The growth of the economy is important, we will grant that…..but those nasty Tariffs are going to kill the Golden Goose as Donovan mentions eloquently. Let’s try this hat for a minute: The USA have 340 Million possible customers. How many does China have again? Why do suppose that folks are busy trying to rent out their resort location homes as AirBnb…just to make the rent? Most of Irvine is now owned by non-migrant Chinese owners………which will become a broader trend ….very soon. If the Pakistani’s, India, Kashmir group ever get grounded it will be an interesting scenario…..to deal with…here in the Good Old USA! The Chinese Economy…even in this downturn year is creeping along with 6.9% growth….vs 4.1$ for the USA…according to the Trumpster! What do they say about Economies of Scale…..again?
Ron & Anna: “How many so-called US Companies are actually still here on shore?” A lot, actually. About 80% of our economic workforce is in the service sector, much of which is hard to render from overseas.
The tragedy is that tariffs hurt 80%of that workforce, for the benefit of less than 0.01% of the businesses (but they spend lobbyist money pretty well to get their way). They might have bought off OC politicians, or OC politicians may have simply zero influence on Trump. Either way, a bad deal for us.
I say that as a rare ‘pro-trade’ progressive: I LIKE trade, and am very confident our workers can compete with anyone anywhere at any wage point – so long as the rules are fair. It’s the fine print that makes me frown: Trump’s little ‘win’ with NAFTA 2.0 is at our expense.
*Donovan, good read on this. As the old saying goes: “Every time they change a Regulation or pass a law…..someone is going to get hurt!” The complexity of course is the Singularity….or Next Technology….which upends various current winners …virtually overnight. The Trumpster and his economic team has focused on Energy – Big Oil – Big LNG – Big Chema and wants to hedge those markets…..which are ebbing technologies. They still downplay Electric, AI, AV Automobiles and Commercial Vehicles and do not understand that the Paradigm Shift is not coming…..but here. Our traditional Brick and Mortar Malls and Sales locations will soon be a thing of the past. The small businesses that provide unique retail….will survive and flourish…like Vacuum Cleaner Stores, Antique Stores, Organic Food Centers, Farmers Markets and of course all ON LINE Retail. When we went up to Mendacino earlier this year…..you could see what type of Retail Shops were going to survive in the future. The Local Hardware store with an incredible amount of great diversity of goods – but good or great quality. The mostly Vinyl Music Shop with collectible Music, Instruments and Electronics. And of course ..the local logo collectibles and specialties. The point is that the way we make purchases of major capital improvements are changing, becoming more global and certainly more National. Perhaps it all started when you could buy a new Burberry Overcoat in Florida without tax back in 1998. The thought that anyone could buy firearms online was way off the table back then. Today, you can buy anything, almost anywhere in the world. If the Trumpster’s Energy push fails….our country will fail big time, because we are not going to be able to buy that many F-150 Pickups or GMC Danali’s to keep this economy moving. Additionally, by shutting the door to immigration, we face empty stores, empty homes and unaffordable housing, due to the influx of ultra rich from around the world, buying up our properties and creating more AirBNB’s….which they hope will balance out the economy with Tourism instead of immigration. Tends to make for a chaotic society….but that’s just our opinion.
“The Trumpster and his economic team has focused on… ebbing technologies.”
Which is why these sorts of steps aren’t helpful to most Californians. They’re also not helpful to the beneficiaries of the tariffs: that sort of protective edge helps make an investment slated to become obsolete in 5 years last another 5 beyond that, but doesn’t change structures on the ground such that they evolve into something that will work for the next generation. On-balance, the winners from tariffs are those with dying investments looking to preserve their wealth a little, and in the short-term only. They hurt everyone else.
Highly recommended for anyone who thinks that protectionism works:
https://www.npr.org/sections/money/2017/02/17/515850029/episode-755-the-phone-at-the-end-of-the-world
Oh, by the way Ron & Anna – that Chevy Silverado or GM Sierra you’ve been dreaming about may well have come from Mexico, where 400,000 of them were built last year, and where 1/3 of all their full-size trucks are built. 😉
Ryan: The nutshell version: when’s the last anyone lined up to buy a Blackberry?
Ordinarily, 3rd world dictators use tariffs to shore up popular support. Our elected leaders are supposed to prevent American politicians from playing similar games. Where are they? Why didn’t they achieve a single substantial benefit for the OC?
Royce’s committee held a hearing on ‘The Future of NAFTA’ in 2017 – did a single Trump negotiator testify?
It’s a very good episode.
Answers the question on what happens when you use protectionism to “get a better deal” from manufacturing and technology.